A branch of HDFC Bank in Mumbai, India on Friday, April 14, 2023.
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India’s Largest Private Lender HDFC Bank completed its merger with Housing Development Finance Corporationthe country’s largest mortgage lender, in a deal that pits the new entity against the world’s biggest banks.
The merger became effective July 1, following shareholder and regulatory approvals.
The merged entity will be the world’s fourth largest bank by market capitalization – behind JPMorgan Chase, Industrial and Commercial Bank of China and Bank of America, said Soumya Rajan, CEO and founder of Mumbai-based Waterfield Advisors.
“This is a defining event in our journey and I am confident that our combined strengths will allow us to create a holistic financial services ecosystem,” said Sashi Jagdishan, CEO of HDFC Bank, on Friday.
“As we navigate the path forward, we will view challenges as opportunities, learn from our experiences, and strive to be the benchmark for success and integrity in the financial services industry.” he said in a Press release.
Merger details
The merger took place on Saturday, about 15 months after the deal was first announced.
HDFC Bank announced last April that it will acquire its parent company Housing Development Finance Corporation, India’s largest housing finance lender, in a $40 billion all-stock deal.
The merger was carried out efficiently thanks to the “shared culture” of the two companies, said Nilesh Shah, managing director of Kotak Mahindra Asset Management.
HDFC shareholders will receive 42 shares of HDFC Bank for every 25 shares they own, and HDFC will cease trading in the Indian stock market on July 13.
The new entity now holds a market capitalization of around $172 billion, Rajan said, adding that it would become India’s second-highest valued company by market capitalization after Trust Industries.
Synergies
“These two powerhouses together should have a significant impact on customer growth and expansion in the days ahead,” Shah told CNBC.
“So for them, one plus one should become 11 and not two or three. They need to leverage those synergies to create an even better organization than the one that has already been created,” he said.
In a presentation to HDFC investorsthe mortgage lender described synergies including access to lower financing costs, operational efficiencies and a wider distribution network for HDFC.
There will also be cross-selling opportunities as 70% of HDFC customers do not have a bank account with HDFC Bank, according to the presentation. Furthermore, of HDFC Bank’s 71 million customers, “only 5% have a mortgage with other mortgage providers and only 2% have a mortgage with HDFC.”
Prior to the merger of the two entities, HDFC was “the organization that provided most people with mortgages and housing loans in India, which they could never have hoped to have in the past,” Rajan said. of Waterfield Advisors.
The merger was “inevitable”, and it now gives customers access to a suite of services and a larger distribution network, she added.
More M&A to come?
Both analysts agreed that more such mergers could be seen from India.
“In this case, you had the case of a mortgage lender, and you had the case of a pure bank, and being able to find the synergies there. Similarly, if there are other stand-alone entities that specialize in specific services – which could be complementary to a bigger bank – I think that will also start to play out (in the context of a merger),” she added.
Shah said HDFC Bank is not part of the MSCI Emerging Market Index but can now be included.
The merger provides the new entity with a “rapid growth opportunity” for global investors looking to invest in India’s banking sector, Shah said.
“It was always an unindexed bet, but despite that, investors felt comfortable owning it. Being part of the index will now very positively bring many more new investors to HDFC Bank,” said said Shah.
Shares of HDFC Bank are up 4.5% since the start of the year, while shares of HDFC rose 7% over the same period, according to FactSet data.
